Sunday, March 15, 2009

ChaosThe newsstand supply chain is in the midst of one of the most dramatic upheavals in recent history. Here's what's happened and how some publishers are coping.BY BILL MICKEY There were some high hopes for the newsstand last year at this time. The wholesalers and retailers were force-feeding some tough medicine into the supply chain by cutting titles from retailer lists and reducing the number of copies shipped-extreme measures designed to produce very optimistic 50-percent sellthrough results. These days, however, the burdens of the supply chain mixed with financially strapped wholesalers and an economy in a nosedive have finally crippled the distribution system-at least for now.

Who knows, by the time you read this, the story of the newsstand could be radically different than what is presented here. Such has been the scene since mid-January when Anderson News and then Source Interlink-together representing upwards of 50 percent of the distribution market-introduced a 7-cent surcharge on all copies shipped, plus an additional demand from Anderson for publishers to pick up a $70 million tab on scan-based trading inventory.

We've witnessed the wrath of publishers at what they characterized as unilateral demands of the two wholesalers; a mixed bag of cooperation and downright hostility from various supply chain players; accusations of conspiracies; an anti-trust lawsuit; and the exit of Anderson News from the market. In the meantime, single-copy sales executives at publishers were at defcon 5 on a daily basis, trying to stay on top of a distribution system in complete disarray while wholesalers, national distributors and even printers scrambled to rework logistics and routing. Meanwhile, retailers, ever in a position of leverage, remained firm in their desire for status quo, which in the end might have helped the supply chain heave itself back into place again.

How Did We Get Here?Back in the mid-nineties, there were an estimated 325 wholesalers serving their own little regional fiefdoms. "They were all making good money," says Baird Davis, a newsstand and circulation consultant and contributing editor to this magazine. "They had little geographic monopolies."

Then, fed up with dealing with scores of wholesalers and their different systems, Safeway kicked off the "retailer revolution," as Davis calls it, and pushed for national deals which resulted in a massive wholesaler consolidation, going from hundreds to four in the space of three or four years: Source Interlink, Anderson News, Hudson News and The News Group. "In effect it broke the geographic monopolies that local wholesalers had enjoyed for about 40 years," says Davis. "After that, other major retail chains began bidding their work out, 'awarding'-on more favorable terms-their work to several wholesalers, rather than using the network of local wholesalers.

The new supply chain introduced new layers of pricing, discounts, store allotments, and so on. The average cover price of a magazine was sliced and diced into a confusing array of portions. Importantly, Safeway ushered in a new powerplay from the retailer community. "Now under new deals, the retailer demanded more money and they didn't care what the publisher offered the wholesaler. The retailer negotiated directly with the wholesaler, they didn't involve the publisher," says Davis.The new supply chain hierarchy also put an increasing financial burden on the wholesaler. "Publishers gave in a little with their discounts, but not to the extent that the wholesalers had to give to the retailers up front," adds Davis.

The 7-Cent Shot Heard Around the IndustryEconomic conditions finally forced Anderson News Company's hand and the wholesaler, which represented more than 20 percent of mass-market magazine distribution, announced in mid-January a program detailing two demands: Publishers must pay a 7-cent, per-copy price increase on all copies distributed and they must take on a $70 million inventory cost attached to scan-based trading (SBT). They gave a deadline for signed agreements of February 1st. Non-compliers would be refused distribution.

The demands came from Charlie Anderson, Anderson's CEO, in a conference call moderated by newsstand analyst John Harrington. "The business has not been profitable and has not been for a very long time," Anderson said.

Indeed, Anderson noted that since the major consolidations in the wholesaler market began 10 years ago, profits had been dwindling ever since. "What we are trying to do is give some stability to the channel. Short of that, there will be an implosion in the business," he said. Boy, was Anderson right, just not in the way he hoped.

The 7-cent figure represented about a 3.5 percent increase and was arrived at by examining all the variables in retail pricing and efficiency costs. Anderson believed the increase was a "fair rate." Publishers were not so convinced. Most were angered by Anderson's sudden demands, citing economic woes themselves.

"To expect publishers to make the decision of spending hundreds of thousands or millions of dollars at any time is difficult. To ask them to do it in a two-week window is absurd," said Jay Annis, VP of single copy sales at Taunton Press.

The second and likely more onerous part of Anderson's demands outlined the wholesaler's exit from bearing the costs of scan-based trading (SBT). "We are no longer going to participate in investment of scan-based trading," Anderson said, and added that they had already invested $70 million into inventories for four major customers.

Anderson said that the greeting card industry, which also uses SBT, passes the cost on to the manufacturer. "We think it is only fair that the manufacturer bear the cost," he said.Anderson said the pricing is non-negotiable-"We really belive the seven-cent number is the number."-and then dropped this bomb: Publishers that don't sign the agreement would effectively be dropped from distribution.

The flip side, however, was Anderson's already precarious position. If publishers didn't comply, the company would be forced out of the magazine distribution business. "We're committed to this. Over the last 12 years we've tried to serve the customer in the best way. The last thing we want to do is exit the business. But why should we be in a business that doesn't give us any return? We don't want to get rich, but we want a fair return and that's all we're asking for."

Then, exactly one week after Anderson announced its price hikes, Source Interlink announced their own. Like Anderson, Source asked for a 7-cent, per-copy surcharge, but no SBT demands. Source's demands, however, were delivered in a letter.

Combined, the two wholesalers are said to account for about 50 percent of the market.

In the letter to clients, Source Interlink Distribution president Alan Tuchman said, "As we continue to aggressively pursue and maintain an effective cost structure within our operation, we've come to the realization that more needs to be done if we are going to overcome the daunting financial challenges that exist."

If the 7-cent surcharge were added to all 3.185 billion copies distributed to retail, the industry-wide cost would be $267 million. Divide that in half, and the one-two punch of Anderson and Source Interlink amounts to an industry cost of $133.5 million.

Distribution System: 'A mess for us all.'It immediately became clear that some national distributors and publishers were not going to play ball. Time Inc. and, by extension, Time/Warner Retail, announced they would not comply with the new pricing structure. Then Curtis, AMI, Bauer, Hachette and others fell into step behind Time Inc.

A powerful backlash was suddenly swelling against Source and Anderson, which were faced with a significant and unsupportable loss of product. "I wouldn't say that Curtis cut [Source] off," said Dennis Porti, Curtis's executive vice president, in support of his company's decision to stop shipping product to Source and Anderson. "Because of their unilateral mandate, they more or less cut themselves off. The publishers simply cannot afford that kind of money."

Meanwhile, Comag, jointly owned by Hearst and Conde Nast, despite a leaked client letter from a mid-level manager at the national distributor that said both Anderson and Source were about to go under, announced it was working with the wholesalers to continue relations under its IMPACT program, which essentially gets the wholesaler to agree to deliver on a bundled set of services for the publisher, which, if completed, qualifies the wholesaler for another layer of compensation. Those compensation levels were being negotiated in order to keep service interrupted.

Unable to sustain viability in the face of the publisher and distributor rebellion, Anderson was forced to shut down its magazine operation only three weeks after it announced the pricing changes. CEO Anderson said he would "continue to hold discussions with publishers and retailers, trying to develop a viable model that allows it to remain in business," adding the situation is "a mess for us all."Source, on the other hand, had other plans. A recalcitrant Jim Gillis, Source's president, accused Time Warner and the others that they were conspiring to shut Source and Anderson out. "This is about American Media and Curtis and Bauer and Time Warner trying to control retailer pricing by eliminating magazine wholesalers so they don't have so many they've got to do business with."

Gillis said he was prepared to maintain contracts with his existing retailers, which approach 35,000 and include Wal Mart and Barnes and Noble, the two biggest magazine sellers. Consequently, American Media, Bauer and Curtis and Time Warner Retail clients would not have product going into those retailers.

Source's chairman and CEO, Greg Mays, sent a letter to retailers in an effort to win sympathy for Source's cause. "This has been caused by an unprecedented and unprovoked assault on this channel by certain publishers and a national distributor. They are trying to lock out competition (Source) in the magazine distribution chain to the retailer's detriment," said the letter.

Mays closed the letter saying that Source was about to file a "major anti-trust lawsuit and [seek] a restraining order so we can continue to properly service your stores."That restraining order was quickly granted by the U.S. District Court for the Southern District of New York, prohibiting publishers and national distributors from denying shipments to Source's magazine distribution business.

It was a major victory for Source because it paved the way for a settlement with Time Inc. and Time/Warner Retail, which soon signed a new, multi-year contract with Source. The new contract, however, did not include the 7-cent surcharge.

Where Does This Leave Us Now?

The suit, while a win for Source, ended up throwing a wrench back into the gears. The channel was on the verge of regaining control of distribution routes, according to a client letter sent by Quebecor, a printer. "Just when it appeared the turmoil was clearing up after the magazine national distributors had reassigned almost all of the Anderson News and Source Interlink wholesaler copies to new wholesalers, a NY judge issued a court order prohibiting publishers and national distributors from denying shipments to Source Interlink's wholesale magazine distribution business," said the letter.Indeed, Taunton's Annis was just about comfortable enough to forecast some normalcy. "Two weeks ago yes, but now no one is daring to forecast because of the Source restraining order and the lawsuit," he says.

In the meantime, publishers are scrambling as the distribution system tries to regain control, putting significant newsstand promotions and allocation plans on hold. It's a whole new ballgame. "Now we are operating outside of our strategy," says Richard Alleger, Rodale's senior vice president, retail sales. "Certain activities are on hold."

Up until the newsstand imploded, Rodale was leveraging a two-brands-is-better-than-one approach to help retailers find extra value. "Rodale is unique in that we have some obvious synergies in our products, like Men's Health and Women's Health. We have worked with a number of retailers in 2008 and 2009 to bring retailer combo promotions depending upon what they are trying to promote."Temporary price reductions were also gaining traction. In fourth quater 2008, Rodale offered price reductions to consumers via in-store coupons. The actual cover price did not change, but the coupons knocked $0.50 to $1.00 off the cover price.

Both of those programs have temporarily been shelved, as is an allocation reduction plan that was helping the company tighten up its print orders. "Up until the supply chain disruption, we've been working with a number of wholesalers to reduce allocations across a category, not juts across a title. We anticipate that when this disruption calms down, we will get back to this again," says Alleger.Annis has been talking to his national distributor, Curtis, several times per day. "From my standpoint, I'm just trying to ship the copies to the places that are going to get them to the retailers. And that's proving to be very difficult right now."So are the printers. In Quebecor's letter, the printer detailed some of the distribution snafus the supply chain breakdown caused. The lawsuit, for one, had caused delivery instructions to the printer to be re-consigned-again-resulting in a deluge of shipping requests and changes that created havoc with Quebecor's already delicate distribution plans. "This caused QW plants and QWL CF locations to start and stop destination re-flagging of pallets, load planning, truck rerouting and stopping of equipment in route on the same day," said the printer.

Meanwhile, Anderson's shutdown exacerbated the confusion over alternative distribution options. Magazine product formerly consigned to Anderson remain on hold at plants, and, in early February, Quebecor delivery trucks were literally turned away from 11 Prologix East locations when they discovered the facilities were closed.

For now, Annis says he's keeping extra-close tabs on his print orders, often making adjustments at the last second. "Many publishers, ourselves included, work with their national distributor to set the allotments by wholesaler based on sellthrough, field work, wholesalers requests, promotions, and so on. Once this is done, the national distributor issues a total print order for the newsstand. This is then combined with our subscription number for a final print order to go to the printer. This ensures no copies are wasted. Lately, I have been giving an overall number for the newsstand, which is combined with subs and sent to the printer. I then go back at the last minute and work the newsstand galley to the number I gave initially to try and get as much time to determine what wholesalers are now servicing what retailers, and making the appropriate allocations for each."

Annis is also taking an opportunity to hit the reset button. "I'm going to use this opportunity to try and improve my sellthroughs. because in a lot of cases you're getting a fresh start and I'm going to try to take advantage of that."

Annis expects wholesalers and distributors will welcome his help in determining new route allocations, not to mention the chance to keep a close eye on existing in-store promotions. "We have checkouts to protect and we have promotions that are going on that we need to ensure get the right amount of copies."

When the dust settle, says Annis, he and his team will physically visit the wholesalers and their national distributor to rework distributions. "I can imagine how flooded they're going to be with trying to set up distributions. We're going to go out there and assist them to make sure they get set up properly.

About Me

a veteran of the printing/publishing industry since 1970, Bob Sacks was always an innovator. Even back in the 70s he followed a more creative path than usual. He started his career where some people end -- with the founding of his own weekly newspaper in the metro New York area.
After several years in the alternative press publishing newspapers in New York and Tucson, Az., he went on to become one of the founding fathers of High Times Magazine.
Since then Bob has held positions that include Publisher, Editor, Freelance Writer, Director of Manufacturing and Distribution, Senior Sales Manager, Circulator, Chief of Operations, Pressman, Cameraman, Lecturer, and Developer of web site companies.
Bob’s resume lists directorships at such prestigious companies as McCall's, Time Inc, New York Times Magazine Group, International Paper, Ziff-Davis, CMP, and Bill Communications (VNU).